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03 140911235945-phpapp01

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  1. 1. BackgroundBackground to Demandto Demand
  2. 2. Background to Demand Marginal Utility Theory
  3. 3. Total and marginal utility meaning of total utility marginal utility: ∆TU/∆Q diminishing marginal utility total and marginal utility curves MARGINAL UTILITY THEORY
  4. 4. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility(utils) Packets of crisps consumed (per day) Darren’s utility from consuming crisps (daily)
  5. 5. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 Utility(utils) Packets of crisps consumed (per day) TU Darren’s utility from consuming crisps (daily)
  6. 6. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 MU in utils - 7 4 2 1 0 -1 Utility(utils) Packets of crisps consumed (per day) TU Darren’s utility from consuming crisps (daily)
  7. 7. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 Packets of crisps TU in utils 0 1 2 3 4 5 6 0 7 11 13 14 14 13 MU in utils - 7 4 2 1 0 -1 Utility(utils) Packets of crisps consumed (per day) TU MU Darren’s utility from consuming crisps (daily)
  8. 8. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 MU ∆TU = 2 ∆Q = 1 MU = ∆TU / ∆Q Utility(utils) Packets of crisps consumed (per day) TU Darren’s utility from consuming crisps (daily)
  9. 9. -2 0 2 4 6 8 10 12 14 16 0 1 2 3 4 5 6 MU MU = ∆TU / ∆Q = 2/1 = 2 Utility(utils) Packets of crisps consumed (per day) TU ∆TU = 2 ∆Q = 1 Darren’s utility from consuming crisps (daily)
  10. 10. The optimum level of consumption: the one-commodity version consumer surplus (total and marginal) marginal consumer surplus: MU – P total consumer surplus: TU – TE MARGINAL UTILITY THEORY
  11. 11. MU P1 Q1O MU, P Q Consumer surplus
  12. 12. Total consumer expenditure MU P1 Q1O MU, P Q Consumer surplus
  13. 13. Total consumer expenditure MU Total consumer surplus P1 Q1 MU, P QO Consumer surplus
  14. 14. The optimum level of consumption: the one-commodity version consumer surplus (total and marginal) marginal consumer surplus: MU – P total consumer surplus: TU – TE maximising consumer surplus: P = MU Marginal utility and the demand curve MARGINAL UTILITY THEORY
  15. 15. MU = D MU, P QO Q1 P1 a Consumption at Q1 where P1 = MU Deriving an individual person’s demand curve
  16. 16. Q2O P1 Q1 a P2 b Consumption at Q2 where P2 = MU MU, P Q MU = D Deriving an individual person’s demand curve
  17. 17. P2 Q2O P1 Q3Q1 a P3 c Consumption at Q3 where P3 = MU b MU, P Q MU = D Deriving an individual person’s demand curve
  18. 18. Limitations of the one-commodity version marginal utility affected by consumption of other goods marginal utility of money not constant Optimum combination of goods the equi-marginal principle MUA/MUB = PA/PB deriving a demand curve MARGINAL UTILITY THEORY
  19. 19. Background to Demand Risk, Uncertainty and Insurance
  20. 20. Demand under conditions of risk and uncertainty defining risk and uncertainty types of odds risk attitudes Diminishing marginal utility of income and attitudes towards risk taking RISK, UNCERTAINTY AND INSURANCE
  21. 21. TU 5000 10 000 15 0000 Income (£) Totalutility U1 Total utility of income a
  22. 22. TU 5000 10 000 15 0000 U2 U1 a b Income (£) Totalutility Total utility of income
  23. 23. TU 5000 10 000 15 0000 U3 U2 U1 a b c Income (£) Totalutility Total utility of income
  24. 24. TU 5000 10 000 15 0000 8000 U3 U2 U1 U4 a b c Income (£) Totalutility d Total utility of income
  25. 25. Insurance: a way of removing risks How insurers spread risks the law of large numbers importance of the independence of risks Problems for insurers adverse selection moral hazard RISK, UNCERTAINTY AND INSURANCE
  26. 26. Background to Demand Indifference Analysis
  27. 27. Indifference curves constructing an indifference curve INDIFFERENCE ANALYSIS
  28. 28. Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g Combinations of pears and oranges that Clive likes the same amount as 10 pears and 13 oranges Constructing an indifference curve
  29. 29. 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22 Pears Oranges Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g Constructing an indifference curve
  30. 30. a Pears Oranges Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g Constructing an indifference curve 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22
  31. 31. a b Pears Oranges Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g Constructing an indifference curve 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22
  32. 32. a b c d e f g Pears Oranges Pears 30 24 20 14 10 8 6 Oranges 6 7 8 10 13 15 20 Point a b c d e f g Constructing an indifference curve 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22
  33. 33. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution INDIFFERENCE ANALYSIS
  34. 34. 0 10 20 30 0 10 206 26 7 UnitsofgoodY Units of good X a b ∆Y = 4 ∆X = 1 MRS = 4 MRS = ∆Y/∆X Deriving the marginal rate of substitution (MRS)
  35. 35. 0 10 20 30 0 10 20 a b UnitsofgoodY Units of good X 26 6 7 d ∆Y = 4 ∆X = 1 ∆Y = 1 ∆X = 1 MRS = 1 MRS = 4 13 14 9 c MRS = ∆Y/∆X Deriving the marginal rate of substitution (MRS)
  36. 36. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution an indifference map INDIFFERENCE ANALYSIS
  37. 37. 0 10 20 30 0 10 20 UnitsofgoodY Units of good X I1 I2 I3 I4 I5 An indifference map
  38. 38. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution an indifference map The budget line constructing a budget line INDIFFERENCE ANALYSIS
  39. 39. Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Assumptions PX = £2 PY = £1 Budget = £30 A budget line
  40. 40. UnitsofgoodY Units of good X a Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Assumptions PX = £2 PY = £1 Budget = £30 Point on budget line a A budget line 0 10 20 30 0 5 10 15 20
  41. 41. UnitsofgoodY Units of good X a b Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Point on budget line a b Assumptions PX = £2 PY = £1 Budget = £30 A budget line 0 10 20 30 0 5 10 15 20
  42. 42. UnitsofgoodY Units of good X a b c Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Point on budget line a b c Assumptions PX = £2 PY = £1 Budget = £30 A budget line 0 10 20 30 0 5 10 15 20
  43. 43. UnitsofgoodY Units of good X a b c d Units of good X 0 5 10 15 Units of good Y 30 20 10 0 Point on budget line a b c d Assumptions PX = £2 PY = £1 Budget = £30 A budget line 0 10 20 30 0 5 10 15 20
  44. 44. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution an indifference map The budget line constructing a budget line effect of a change in income INDIFFERENCE ANALYSIS
  45. 45. UnitsofgoodY Units of good X Assumptions PX = £2 PY = £1 Budget = £30 Effect of an increase in income on the budget line 0 10 20 30 40 0 5 10 15 20
  46. 46. UnitsofgoodY Units of good X Assumptions PX = £2 PY = £1 Budget = £40 Budget = £40 Budget = £30 16 7 0 10 20 30 40 0 5 10 15 20 m n Effect of an increase in income on the budget line
  47. 47. Indifference curves constructing an indifference curve the shape of an indifference curve diminishing marginal rate of substitution an indifference map The budget line constructing a budget line effect of a change in income effect of a change in price INDIFFERENCE ANALYSIS
  48. 48. 0 10 20 30 0 5 10 15 20 25 30 Effect on the budget line of a fall in the price of good XUnitsofgoodY Units of good X Assumptions PX = £2 PY = £1 Budget = £30
  49. 49. 0 10 20 30 0 5 10 15 20 25 30 Effect on the budget line of a fall in the price of good XUnitsofgoodY Units of good X Assumptions PX = £2 PY = £1 Budget = £30
  50. 50. 0 10 20 30 0 5 10 15 20 25 30 Effect on the budget line of a fall in the price of good XUnitsofgoodY Units of good X Assumptions PX = £1 PY = £1 Budget = £30
  51. 51. Effect on the budget line of a fall in the price of good XUnitsofgoodY Units of good X Assumptions PX = £1 PY = £1 Budget = £30 B1 B2 a b0 10 20 30 0 5 10 15 20 25 30 c
  52. 52. The optimum consumption point INDIFFERENCE ANALYSIS
  53. 53. Finding the optimum consumption UnitsofgoodY Units of good X O
  54. 54. I1 I2 I3 I4 I5 UnitsofgoodY Units of good X O Finding the optimum consumption
  55. 55. I1 I2 I3 I4 I5 UnitsofgoodY O Units of good X Budget line Finding the optimum consumption
  56. 56. I1 I2 I3 I4 I5 UnitsofgoodY O Units of good X r v s u Y1 X1 t Finding the optimum consumption
  57. 57. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB INDIFFERENCE ANALYSIS
  58. 58. I1 I2 I3 I4 I5 UnitsofgoodY O Units of good X r v s u Y1 X1 t Finding the optimum consumption
  59. 59. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB The effect of a change in income INDIFFERENCE ANALYSIS
  60. 60. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB The effect of a change in income the income–consumption curve INDIFFERENCE ANALYSIS
  61. 61. UnitsofgoodY O Units of good X B1 Effect on consumption of a change in income I1 a
  62. 62. I2 UnitsofgoodY O Units of good X B1 B2 I1 Effect on consumption of a change in income
  63. 63. I2 UnitsofgoodY O Units of good X B1 B2 B3 B4 I1 I3 I4 Effect on consumption of a change in income
  64. 64. I2 UnitsofgoodY O Units of good X B1 B2 B3 B4 I1 I3 I4 Income-consumption curve Effect on consumption of a change in income
  65. 65. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB The effect of a change in income the income–consumption curve the Engel curve INDIFFERENCE ANALYSIS
  66. 66. Bread B1 B2 B3 I3 I2 I1 CDs Deriving an Engel curve from an income-consumption curve
  67. 67. B1 B2 B3 I3 I2 I1 Income-consumption curve CDs Bread Deriving an Engel curve from an income-consumption curve
  68. 68. B1 B2 B3 I3 I2 I1 Income-consumption curve CDs BreadIncome(£) Deriving an Engel curve from an income-consumption curve
  69. 69. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb1 Qcd1 a Deriving an Engel curve from an income-consumption curve
  70. 70. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb1 Y1 Qcd1 Qcd1 a a Deriving an Engel curve from an income-consumption curve
  71. 71. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb2 Qb1 Y2 Y1 Qcd2 Qcd1 Qcd2 Qcd1 a b a b Deriving an Engel curve from an income-consumption curve
  72. 72. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb3 Qb2 Qb1 Y3 Y2 Y1 Qcd3 Qcd2 Qcd1 Qcd3 Qcd2 Qcd1 a b c a b c Deriving an Engel curve from an income-consumption curve
  73. 73. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb3 Qb2 Qb1 Y3 Y2 Y1 Qcd3 Qcd2 Qcd1 Qcd3 Qcd2 Qcd1 Engel curve a b c a b c Deriving an Engel curve from an income-consumption curve
  74. 74. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB The effect of a change in income the income–consumption curve the Engel curve income elasticity of demand and the income–consumption curve INDIFFERENCE ANALYSIS
  75. 75. B1 B2 B3 I3 I2 I1 Income-consumption curve BreadIncome(£) CDs Qb3 Qb2 Qb1 Y3 Y2 Y1 Qcd3 Qcd2 Qcd1 Qcd3 Qcd2 Qcd1 Engel curve a b c a b c Deriving an Engel curve from an income-consumption curve
  76. 76. The optimum consumption point equating the marginal rate of substitution with the price ratio MRS = MUA/MUB = PA/PB The effect of a change in income the income–consumption curve the Engel curve income elasticity of demand and the income–consumption curve the effect of a rise in income on the demand for an inferior good INDIFFERENCE ANALYSIS
  77. 77. Effect of a rise in income on the demand for an inferior goodUnitsofgoodY (normalgood) Units of good X (inferior good) O I1B1 a
  78. 78. UnitsofgoodY (normalgood) O I2 I1B1 B2 a b Units of good X (inferior good) Effect of a rise in income on the demand for an inferior good
  79. 79. UnitsofgoodY (normalgood) O Income-consumption curve I2 I1B1 B2 a b Units of good X (inferior good) Effect of a rise in income on the demand for an inferior good
  80. 80. The effect of changes in price the price–consumption curve INDIFFERENCE ANALYSIS
  81. 81. 0 10 20 30 0 5 10 15 20 25 30 Assumptions PX = £2 PY = £1 Budget = £30 Effect of a fall in the price of good XUnitsofgoodY Units of good X
  82. 82. UnitsofgoodY Units of good X Assumptions PX = £2 PY = £1 Budget = £30 B1 I1 0 10 20 30 0 5 10 15 20 25 30 j Effect of a fall in the price of good X
  83. 83. UnitsofgoodY Units of good X B1 I1 j Assumptions PX = £1 PY = £1 Budget = £30 0 10 20 30 0 5 10 15 20 25 30 Effect of a fall in the price of good X
  84. 84. UnitsofgoodY Units of good X Assumptions PX = £1 PY = £1 Budget = £30 B1 I1 B2 a j 0 10 20 30 0 5 10 15 20 25 30 I2 k Effect of a fall in the price of good X
  85. 85. 0 10 20 30 0 5 10 15 20 25 30 UnitsofgoodY Units of good X B1 I1 B2 a j I2 Price-consumption curve k Effect of a fall in the price of good X
  86. 86. The effect of changes in price the price–consumption curve deriving the individual's demand curve INDIFFERENCE ANALYSIS
  87. 87. Deriving a demand curve from a price-consumption curve B1 I1 Expenditureon allothergoods Units of good X a
  88. 88. I2 Deriving a demand curve from a price-consumption curve B1 B2 I1 Expenditureon allothergoods Units of good X a b Fall in the price of X
  89. 89. I2 Deriving a demand curve from a price-consumption curve B1 B2 I1 Expenditureon allothergoods Units of good X a b Further falls in the price of X
  90. 90. Deriving a demand curve from a price-consumption curve B1 B2 B3 I3 I2 I1 I4 B4 Expenditureon allothergoods Units of good X a b c d Further falls in the price of X
  91. 91. Deriving a demand curve from a price-consumption curve B1 B2 B3 I3 I2 I1 I4 B4 Expenditureon allothergoods Units of good X Price-consumption curve a b c d
  92. 92. Deriving a demand curve from a price-consumption curve B1 B2 B3 I3 I2 I1 I4 B4 Expenditureon allothergoods Units of good X a Price-consumption curve b c d PriceofgoodX Units of good X P1 Q1 a
  93. 93. Deriving a demand curve from a price-consumption curve B1 B2 B3 I3 I2 I1 I4 B4 Expenditureon allothergoods Units of good X a Price-consumption curve b c d PriceofgoodX Units of good X a Demand P1 P2 P3 P4 Q1 Q2 Q3 Q4 b c d
  94. 94. The effect of changes in price the price–consumption curve deriving the individual's demand curve Income and substitution effects of a price change INDIFFERENCE ANALYSIS
  95. 95. The effect of changes in price the price–consumption curve deriving the individual's demand curve Income and substitution effects of a price change a normal good INDIFFERENCE ANALYSIS
  96. 96. UnitsofgoodY I1 I2 I3 I4 I5 I6 B1 f QX1 Income and substitution effects: normal good Units of Good X
  97. 97. UnitsofgoodY I1 I2 I3 I4 I5 I6 B2 h B1 QX1 f Rise in the price of good X Income and substitution effects: normal good Units of Good X QX3
  98. 98. UnitsofgoodY B2 Substitution effect B1 QX1 h f I1 I2 I3 I4 I5 I6 QX2 B1a Substitution effect of the price rise g Income and substitution effects: normal good Units of Good X QX3
  99. 99. Units of Good X UnitsofgoodY I1 I2 I3 I4 I5 I6 Substitution effect Incom e QX1 h f g B2 B1 QX2 QX3 B1a Income effect of the price rise Income and substitution effects: normal good
  100. 100. The effect of changes in price the price–consumption curve deriving the individual's demand curve Income and substitution effects of a price change a normal good an inferior good INDIFFERENCE ANALYSIS
  101. 101. Units of Good X UnitsofgoodY B1 Income and substitution effects: Inferior (non-Giffen) good f QX1 I1 I2
  102. 102. Units of Good X UnitsofgoodY f QX1 B2 QX3 I1 I2 Rise in the price of good X h B1 Income and substitution effects: Inferior (non-Giffen) good
  103. 103. Units of Good X UnitsofgoodY f QX1 B2 h QX2 I1 I2 Substitution effect B1a Substitution effect of the price rise B1 Income and substitution effects: Inferior (non-Giffen) good g
  104. 104. Units of Good X UnitsofgoodY f QX1 B2 g QX2 QX3 I1 I2 Substitution effect h Income effect B1a Income effect of the price rise B1 Income and substitution effects: Inferior (non-Giffen) good
  105. 105. The effect of changes in price the price–consumption curve deriving the individual's demand curve Income and substitution effects of a price change a normal good an inferior good a Giffen good (a special type of inferior good) INDIFFERENCE ANALYSIS
  106. 106. Units of Good X UnitsofgoodY B1 Income and substitution effects: Giffen good f QX1 I1 I2
  107. 107. Units of Good X UnitsofgoodY f QX1 B2 QX3 I1 I2 Rise in the price of good X h B1 Income and substitution effects: Giffen good
  108. 108. Units of Good X UnitsofgoodY f QX1 B2 h QX3 I1 I2 QX2 B1a g Substitution effect Substitution effect of the price rise B1 Income and substitution effects: Giffen good
  109. 109. Units of Good X UnitsofgoodY f QX1 B2 h QX3 I1 I2 g QX2 Substitution effect Income effect Income effect of the price rise B1 Income and substitution effects: Giffen good B1a
  110. 110. The effect of a change in price on the demand for other goods The usefulness of indifference analysis superiority of using ordinal measures limitations of indifference analysis INDIFFERENCE ANALYSIS

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